A new regime for digital players in the UK

In the UK, the government is working on a new statutory regime to tackle competition concerns in digital markets with a view to promoting greater competition and innovation for consumers and businesses. We look at what the scope of the new regime is likely to be and what has been done so far. 

Following recommendations by the Furman Review (produced by an expert panel tasked by HM Treasury with reviewing competition in the digital economy and chaired by Jason Furman), the government set out its proposals in a consultation paper entitled A new pro-competition regime for digital markets. The consultation ran between July 2021 and October 2021.

In its response, published in May 2022, the government recommended the creation of a Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA) which is to play a central role in the new statutory regime. The DMU is to be responsible for identifying firms with Strategic Market Status (SMS), overseeing a mandatory code of conduct for those firms and implementing pro-competitive interventions. To designate a firm with SMS, the DMU will be required (without formally defining relevant markets in the UK) to test and conclude that the firm has substantial and entrenched market power in at least one activity, providing it with a strategic position.

Non-statutory Digital Markets Unit

The DMU was launched within the CMA on a non-statutory basis in April 2021 in anticipation of new legislation which will enact the DMU and its work into law. The non-statutory DMU is currently focusing on:

• carrying out preparatory work to implement the statutory regime, including building teams with the relevant capabilities and preparing draft guidance
• supporting government on establishing the statutory regime based on advice of the Digital Markets Taskforce
• gathering evidence on digital markets in reliance on the work of the CMA which continues to use its existing powers to investigate harm to competition in digital markets
• engaging regulators, both domestically through the Digital Regulation Cooperation Forum and internationally, to strengthen cooperation and promote greater coherence across regulatory approaches, and 
• engaging stakeholders across industry, academia, other regulators and government to ensure diverse insights underpin the new regime.

Mandatory code of conduct for firms with SMS

Firms designated with SMS will be required to follow rules of acceptable behaviour with competitors and customers for fair trading, open choices, and trust and transparency. Under the new regime, the code of conduct is to be underpinned by robust investigation and enforcement powers. These may include imposing fines of up to 10% of a firm’s turnover for the most serious breaches.

The DMU could also be given powers to suspend, block and reverse market behaviour by firms designated with SMS in breach of the code, for instance unfair changes in their algorithms or terms and conditions, and order them to take specific actions to comply with the code.

Pro-competitive interventions

Where an adverse effect on competition resulting from entrenched power in digital markets can be demonstrated, the DMU may, in future, be able to impose pro-competitive interventions in order to address the root causes of the issues identified. This will be subject to safeguards to prevent harming consumers, such as consultation requirements and right of appeal. The DMU will be empowered to run investigations and implement the remedies it considers appropriate. The remedies can be far-reaching, for example enforcing interoperability between platforms and services and, where other remedies are considered insufficient, separating ownership.

New merger rules for firms with SMS

Following the public consultation in 2021, the government's proposals on merger rules for firms designated with SMS have been significantly narrowed down. The government has, in particular, abandoned its initial plan to introduce a separate merger regime for firms with SMS which would operate in parallel to the wider merger regime. 

The focus of the latest proposals appears to be on ensuring that the CMA has visibility over transactions carried out by firms designated with SMS. However, proposals for the mandatory reporting and review requirements have been refined to ensure that these are proportionate and limit burdens on business. Accordingly, firms designated with SMS will be under an obligation to report only their most significant transactions (as opposed to all transactions as previously planned) to the CMA prior to completion. 

The most significant transactions will be those in which:  

• a firm with SMS acquires over 15% of equity or voting shares after the transaction,
• the value of the acquirer's holding exceeds £25m, and
• the transaction meets a UK nexus test (which could be established by reference to certain conditions such as the target business having either assets or revenues, users, employees, R&D activities or legal presence in the UK).

Once a transaction has been duly reported, the CMA will undertake an initial assessment of the transaction to determine whether to investigate further. The CMA can request further information, launch a merger investigation, or both. No changes to intervention thresholds will be carried out in respect of Phase 2 merger investigations. 

Revolutionising the regulatory landscape

The launch of the DMU within the CMA is a sign of the government's determination to get the planned reform started. Although the government's proposals still have to go through Parliament to become law and can change during the legislative process, they are likely to revolutionise the regulatory landscape for digital players in the UK with far-reaching consequences. With similar aims to the EU's Digital Markets Act, it remains to be seen which regime proves the most effective.